Surviving globalization

By ERNEST F. HOLLINGS, former U. S. senator

MAY 13, 2013 -- We all believe in open markets, free trade and are against protectionism.


It's hard to realize that the Founding Fathers built the United States into an industrial power with an Industrial Policy. Two years before the Constitution, Congress enacted the Tariff Act of 1787 providing that manufactured imports would always be more expensive than domestic production.

Henry Clay, one of Kennedy's Profiles in Courage, exclaimed about free trade on the floor of the United States Senate in 1886: "It never existed, it never will exist." Abraham Lincoln was a protectionist and Theodore Roosevelt wrote in a letter: "Thank God I am not a free trader" (The Great Betrayal by Pat Buchanan). But after World War II, the United States had the only industry and we were anxious to open markets -- free trade! Japan refused, closing its market, subsidizing its manufacture, selling its export at cost, making up the profit in the closed market with Toyota becoming number one and putting General Motors into bankruptcy.

Now comes China with the ultimate of protectionism -- if you want to sell in China, you must produce in China. China controls its government, market, production, labor, technology, and trade -- its economy. With the world's largest market setting the competition in globalization, the United States has to act against predatory practices and develop an industrial policy to survive in globalization.

That's the point. We're being drained dry with Corporate America offshoring its research, technology, production, jobs -- our economy. But economists keep saying that the economy is lethargic because of a lack of consumer demand. Payrolls are being offshored and its lack of consumer money. Paul Krugman, the Nobel economist, keeps calling for stimulation, after we've stimulated $5 trillion in the past five years.

Harold Meyerson, the labor expert, suggests that local unions strike to up the minimum wage (Washington Post, 5/9/13) to get the economy up. Martin Feldstein writes in the Wall Street Journal (5/10/13): "That a stronger recovery must depend on fiscal action and tax reform by the President and Congress." Republicans call for tax cuts to get the economy going and Democrats call for stimulation and tax increases. President Obama calls for tax reform and federal aid for research, development and skills. The U.S. has the best of R & D, innovation, technology, universities and skills. Little South Carolina has the skills to make "the ultimate driving machine" for BMW and Boeing's Globemaster but we have 8.4 percent unemployment because our textile industry has been offshored. Once and for all, the economy is being offshored in globalization and the economists, political pundits, the President and Congress must acknowledge the offshoring and the need for an industrial policy.

"An entrepreneur in the United States can start production and be making a profit but he has to pay the 35 percent Corporate Tax and is levied a 17 percent VAT when his exports reach China."

-- Hollings

It's easy. All Congress has to do is replace the 35 percent Corporate Income Tax with a 7 percent Value Added Tax. This tax cut immediately releases $2 trillion in offshore profits for Corporate America to repatriate tax free, create millions of jobs and rebuild our economy. This tax cut provides billions to balance the budget in two years, rather than ten. Since the VAT has no loopholes, we have instant "tax reform" and "fiscal action" that Martin Feldstein calls for.

The VAT is not just a good idea, but a necessity. An entrepreneur in the United States can start production and be making a profit but he has to pay the 35 percent Corporate Tax and is levied a 17 percent VAT when his exports reach China. A competitor can produce the same product in China, import it tax free, and put the entrepreneur out of business. This 52 percent difference is destroying manufacture in the United States. Already Southern Governors have gone to foreign competition for industry using the VAT.

I have on Ecco shoes, produced in Denmark, with a 25 percent VAT that's rebated when Denmark sends the shoes to Nashville for distribution. This 60 percent difference could put Alan Edmunds out of business. Toyota and BMW send parts VAT free for assembly in the United States to help put General Motors into bankruptcy. Finally, the President has to protect not all production, but production vital to a strong economy. If President Bush and President Obama had enforced the Defense Production Act of 1950, a Detroit bailout would not have been necessary. If President Obama would protect steel, motor vehicles, computers and machine tools like President Reagan in 1984, we could create millions of jobs and have a strong economy.

Senator Hollings of South Carolina served 38 years in the United States Senate, and for many years was Chairman of the Commerce, Space, Science & Transportation Committee. He is the author of Making Government Work (University of South Carolina Press, 2008).

© 2013, Ernest F. Hollings. All rights reserved. Contact us for republication permission.

About Fritz Hollings

Ernest F. Hollings served the public for 56 years -- 38 years in the United States Senate and as South Carolina's governor, lieutenant governor and a member of the S.C. House of Representatives.

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